The ONE tip to financial success. Yep – just one – that’s all you need!
When people think about building their financial success, they tend to think about complex investments, building a property empire, creating the next Twitter, etc etc.
However, reaching financial success isn’t as complicated as this. In my opinion, there is only one key factor to financial success – keeping track of your finances. That is all. Everything else will look after itself afterwards.
To do this, it is important to form a long-term subconscious habit to track your finances. Let’s look at habits and some ways to form them and avoid failure.
Financial success vs weight loss
There are a huge number of similarities between growing your net worth and losing weight. How many times have you, or people you know, tried different diets. The thing with all 90% of these diets – they fail.
Why do they fail? Well, mainly because the changes are too big and they do not form habits. Without forming a habit, changes do not become permanent and you will not see very long-term success.
So, how do you form a habit?
Forming a new habit
Habits are hard to form. Often I have started to focus on something, but have given up within a few days because I have forgotten to do something. This is the most notable when trying normal New Year’s resolutions.
There are three key factors in forming a new habit, as determined by Stanford professor, BJ Fogg:
This can be more easily remembered as “the three Rs” – reminder, routine and reward.
Let’s look at one example of an everyday habit that you don’t even think about – answering the phone.
- Reminder – the action begins by a certain trigger – the phone rings
- Routine – the normal behavior is taken – you answer the phone
- Reward – the result of the routine – you find out who is ringing and can communicate with them
Understanding the reward, and its positive effect, encourages you to complete the routine which is performed every time you notice a reminder.
The routine is usually an obvious action – it is what you are trying to do. It’s the reminder and reward that usually leads to the failure.
Why habits fail?
Habits always fail because you do not perform the routine. This is only happens in three possible scenarios:
- You don’t link the reminder to the routine
- You don’t notice the reminder
- You don’t understand the reward and therefore don’t see the routine as being worthwhile
For weight-loss, as with most new habits, the main reason that any of these three occur is that you forget about it. The main reason you forget is that you are trying to change too much at once.
The failure of the reminder
Let’s say that you are trying to do more sit-ups. You may tell yourself that you are going to do 100 sit-ups a day. You have the routine sorted (the specifics of the routine of a 100 crunches) and you fully understand and believe in the reward (you are going to look awesome on the beach this summer).
However, without setting a reminder, you forget to do this every day. The reminder might be every time you go to clean your teeth at night; you do your sit-ups first. It might be whenever you start to make dinner you stop to do your sit-ups.
The easiest way to set a reminder is to attach it to a habit that is already completely embedded and that you never forget.
The failure of the routine
You are going to be a better cook! Your reminder is set – every time you make dinner; you will try to make something fantastic. The reward is obvious – you are going to eat some incredible food!
However, without determining the actual routine (i.e. work through a series of new recipes which have been set out beforehand), you have no chance of succeeding.
The failure of the reward
You give up alcohol for January: dry January. The reminder is being in the pub or opening a bottle of wine. The routine is not drinking the alcoholic beverages. Pretty simple.
However, if you don’t understand the rewards, you are going to have the drink even though you know you shouldn’t. If you are only doing dry January because some friends on Facebook are, you will not be fully committed to the reward and will fail.
How long does it take to form a new habit?
The most accepted advice is that to form the three R pattern into your life so that something becomes a natural habit takes 21 days.
Focus really hard for those 21 days and always keep a diary. Tick off your success every day. After that, it should become second nature.
The real key to financial success: form one habit at a time
Here comes the real trick. The main reason for failure with habits is that they are too general and when you are trying to form a new habit, you are actually trying to make many at once.
Imagine that your new goal is to lose weight. You may think that this is your habit. However, your real new habits you are trying to add are:
- Eat X amount of certain foods
- Stop eating Y amount of certain foods
- Stop drinking more than Z amount of alcohol
- Give up coffee
- Stop eating dessert
- Run X miles every two days
- Go to the gym 3 times a week
Forming so many habits at once is impossible and you will fail. Instead, just make ONE specific habit at a time.
For example, in his book the 4 hour body, Tim Ferriss gives the example where his father could never lose weight even though he had been trying for years. What did he suggest? Have 30g of protein within 30 minutes of waking up. And for the first 30 days, change nothing else. This will form a good habit which will become second nature. After this, you may start to focus on one aspect of exercise or diet.
How does this relate to the title of this article: “The ONE tip to financial success”?
The ONE tip to financial success – form one habit today
For anyone who has a long term goal to achieve financial success (in reality, who doesn’t, right?), then I would suggest that you build one habit today. Awesomely, that habit is the same for absolutely everyone:
KEEP TRACK OF YOUR FINANCES
How easy is that? Very. However, it made a HUGE difference for me personally.
After finishing university, I managed to secure a place on a graduate scheme at a professional services firm. It was the first time in my life that my salary hadn’t been earned by the hour working in bars, cafes, shops, market stalls and through any other work I could find.
I was excited. Finally, I was going to be earning enough money to start building my financial wealth. I was going to be rich!
However, what it took me many years to understand was that without specific focus on my budget, my goals and becoming wealthier, I wouldn’t progress in my financial life.
Making the habit of keeping track of your finances
The first thing you need to do is create an Excel spreadsheet. Within this spreadsheet, I want everyone to make one tab for your net worth and one tab for your budget.
In your net worth tab, list all your assets (cash, investments, retirement, property, cars, money that your mate owes you…) and your liabilities (credit cards, student loans, tax liabilities, mortgages, money that you owe your parents…).
In your budget tab, go through your prior month’s bank statements and create 10-15 general categories to place your income and expenses (salary, tax, other income, mortgage repayment, groceries, eating out, gifts, etc.). For detail of how to create and manage a budget, the following video is worth a watch:
Keeping track of your finances – the reminder
Choose a time period where you will set aside 15-20 minutes to update this spreadsheet. For most people, I would suggest weekly. Pick another habit that will remind you to always do this. This, for example, could be when you are getting your stuff ready for Monday morning work on Sunday night.
Keeping track of your finances – the routine
Go through the spreadsheet (line-by-line) and update all your net worth items and book any income/expenses for that week against your budget. Also, make sure that you make a comparison to the prior week to determine where you have performed well or badly and make the appropriate changes.
Keeping track of your finances – the reward
Understand your ultimate financial goal in life. What does financial success look like? Make it huge; make it aspirational. Mine is to own a property in the South of France overlooking the sea, enjoying rosé wine and amazing steak. If I think about this image every time I get the reminder, the routine is ALWAYS performed!!
What comes next?
Well, after you have created your net wealth and budget and this becomes a habit, you can expand your spreadsheet into other areas. Mine currently has the following tabs:
- Net worth
- Investments – where I keep track of my ROIs for different investments
- Property – where I log more detail about my rental properties
- Tax & Info – data on my tax liabilities
- Shares – list of my funds and ETFs (both retirement and ISAs)
- Moneystepper – financial information related to this site
- 2014 goals – Progress which makes these updates
- Hospital bills – a log of bills which I need to have reimbursed due to my recent accident
- Loyalty cards – a list of my reward points from hotels
- Quidco – a list of all purchases in quidco and expected cashback
- Funding circle – detail of my funding circle investment and returns
This is the same habit, but the routine is now a little longer and takes me around 30 minutes to complete each week. Completely worth it for the reward!
Each time you include a new tab, you will begin to become better informed about this subject. It’s a wonderful cycle that never stops improving! One of the many reasons I’m an Excel geek!!
The routine works
This one change made such a big difference for me. Over the previous 5-6 years, my net worth never seemed to increase much. Once I started tracking my finances, my results were also immediate and incredible.
I’m embarrassed to say that I only started to adopt this approach 2-3 years ago. However, as soon as I started making this a priority, my results almost immediately changed. I went from my net wealth staying static, to marking 50-100% increases in my net wealth each year since.